How Rewards Credit Cards Could Do More Harm Than Good

Borrowing, Credit Cards, Credit Rating

Who doesn’t love cash back rewards? We all enjoy the feeling of getting something back with our purchases, and credit card companies know this. They offer rewards programs as incentives – and a recent survey from shows that cash back programs are the most attractive variety.

Almost one-third (31%) of survey respondents chose 3% cash back on all purchases as their preferred option. That’s nearly double the percentage that preferred a $500 sign-up bonus (17%) or an eighteen-month 0% intro APR on purchases (14%). Cash back was preferred almost three-to-one over a 21-month 0% intro APR period on balance transfers or a $1,200 sign-up bonus good for airfare and hotel usage. Check out our list of cash back credit card offers.

However, rewards come at a price. Credit card companies expect a return on their investment, and not just through the recruitment of new customers.

Some card issuers recoup their rewards with fees, although many no-fee rewards cards are available. The survey found that 72% of consumers have at least one rewards card with no annual fee, and only 10% of consumers had at least one card with an annual fee over $150. Credit card companies also receive revenue from merchant fees – but your interest charges are another significant income source.

Rewards programs provide greater incentive to spend beyond your ability to pay and wind up with interest payments. A 2018 NerdWallet study of Americans with travel credit cards found that just over one-third of respondents admitted overspending just to get the rewards points. If you’re spending beyond your budget – or worse, you don’t keep track of your spending at all – you’re more likely to wipe out your benefits with interest charges.

According to, the average annual percentage rate (APR) on a cash back credit card is 17.68% – significantly above the 14.71% average APR for low-interest cards. A difference of around three percentage points can quickly wipe out your gains with interest charges if you don’t pay the charges back in full.

For every $1,000 of eligible purchases on a 3% cash back card, you earn $30. Let’s say you have a balance of $5,000 in all new charges in the first month of your new card. You’ve earned $150.

Now let’s assume you pay that balance off over the next three months, with no new charges. You’ll pay $148.05 in interest, basically wiping out your rewards. Change that to a 14.71% interest rate card and you’ll pay $123.08 in interest, retaining $24.97 of your hard-earned rewards.

What happens if you transfer that balance to a 0% balance card? You’ll pay no interest at all since you’re paying off the debt within the introductory APR. Based on the survey results, most consumers don’t care. They would rather have the benefits of the cash back program.

Sign-up bonuses can also lead to overspending by giving you the incentive to meet minimum spending limits in a short time. If you have to carry a balance to get the sign-up bonus, you’d better be able to pay it off quickly to make the sign-up bonus worthwhile. Take your pick from this list of sign-up bonus credit cards.

Rewards cards are not only attractive, but they can also help your bottom line – as long as you use them responsibly. Always use your cards within a reasonable budget and avoid impulse buys. Never spend more than you can afford to pay off at the end of each billing cycle and make your payments on time every month. You’ll get double benefits – cash back without any interest charges and a high credit score that reflects your responsible use of credit.

You can check your credit score and read your credit report for free within minutes by joining MoneyTips.

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